Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said that while he is amenable to an off-cycle rate hike, this will depend on the September inflation and other crucial economic data.

For the inflation-targeting central bank, Remolona said the numbers are critical such as the Oct. 5 consumer price index (CPI) report for the month of September.

But, he is quick to add, “one number doesn’t make for a policy hike.”

The BSP reported on Sept. 29 that the September CPI could settle between 5.3 percent -- which was August’s actual rate -- to a four-month high of 6.1 percent.

The BSP will wait for the September CPI on Oct. 5 and the third quarter gross domestic product (GDP) growth rate to be announced on Nov. 8 before deciding on an off-cycle rate hike.

Since the BSP does receive advance notice on these crucial data, it could make a move outside of the scheduled policy meetings, between Oct. 5 and immediately after Nov. 8. Some market analysts predict the third quarter GDP will be higher than the previous quarter’s 4.3 percent but not much. A few forecasts 5.2 percent GDP growth for the July to September months, still below the six percent to seven percent projection by the government.

There are only two remaining Monetary Board policy meetings for this year, on Nov. 16 and Dec. 14.

Remolona has signaled last week that an off-cycle target reverse repurchase (RRP) rate adjustment is “possible”.

For now, he said that based on their own estimates, the past rate hikes which was a cumulative 425 basis points – “hasn’t yet affected GDP growth” but BSP tries to “balance supply and demand so that the inflation rate is within our target range”. The target band is two percent to four percent average CPI for 2023 until 2025.

“Two things to be considered when it comes to monetary policy and growth,” he said during a recent economic forum. “In our own estimate (based on BSP models) of the output gap, it’s basically zero (which) means we’re at just the right level for policy rate when it comes to output growth,” he explained.

The other thing they look at is the neutral interest rate which is the policy rate minus expected inflation.

After computation, the neutral interest rate is around four percent. This is arrived at by subtracting the middle target range of inflation which is three percent to the target RRP rate of 6.25 percent.

According to Remolona, “our neutral policy rate as computed (by the BSP) is 3.8 percent to four percent. So when it comes to the nominal – and our policy rate is a nominal rate – we can still raise up to 6.8 percent and still not affect (a) contraction in the economy.”

However, Remolona said they are still reviewing and assessing what will be the terminal or end-2023 policy rate for the BSP.

He has signaled that the BSP, with emerging supply shocks, will likely raise the benchmark rates not once but twice before the year ends. An off-cycle rate hike could make it into a three-pronged rate adjustments.

Depending on the inflation data that will come out in September, October and November, the BSP is likely to lift the policy rate by 25 bps on Nov. 16 and another 25 bps on Dec. 14 which is the last policy meeting for 2023. If this happens, the final end-year BSP policy rate will be 6.75 percent from its current 6.25 percent. An off-cycle rate hike will further adjust the key rate to as much as eight percent.

With persistent upside risks, the biggest supply shock concerns for the BSP are transport fare hikes. The other worry is the increase in electricity rates. Remolona said these two concerns alone could increase CPI by about 0.5 percent.

From the Sept. 21 policy decision, the BSP adjusted upwards its inflation forecast for 2023 to 5.8 percent versus its August projection of 5.6 percent, following the higher August inflation, oil price hikes and depreciation of the peso.

The 2024 inflation forecast is also now higher at 3.5 percent from 3.3 percent while the 2025 estimate is maintained at 3.4 percent.

Remolona said inflation will likely stay elevated in September and October but is still confident the consumer price index (CPI) will fall within the target range of two percent to four percent by November this year.

He said the supply shocks “seem to dissipate fairly quickly but the problem is there tend to be new supply shocks.”